Tag Archives: Software and Economics

How Applied Software Economics Can Solve Technology Providers Problems

In an earlier post, I talked about the role of Economics in the Software Industry, or lack thereof, and how I embarked on a journey to seek a Master’s Degree in Business Economics to seek out the truth of whether or not economics can be applied to software technology to solve some of the problems ailing the industry.

I pursued my economics degree in earnest to investigate whether or not there are potential benefits/explanations in applying an interdisciplinary approach and if the application of certain economic concepts could have the potential to positively impact the software industry. The software industry which is riddled with many infamous stories of epic failures (healthcare.gov!!), monopolistic behavior, collusion (see this amazing post on a secret non-poaching pact in Silicon Valley titans of technology),

All of the companies I worked for did not employ anyone with an Economics Degree (even if they did, that was not their primary job), just simply Finance! Almost the entire middle management layer are financial planners with a massive preoccupation of the 30/60/90 day budget/revenue planning/forecast, revenue attainment, etc, cycle which occurs, four times a year and they were busy making calls to folks in the field asking whether they will close the deal or not! You know the type and you almost always feel that while you are doing actual valuable work, they are just counting the beans you are bringing in!!

Anyway, to offset this massive resource drain of corporate resources of “Finance” layers, groups started sprouting up within the boundaries of the corporation and sometimes through a recommendation from an outside firm (a Management Consulting firm) with the groups’ primary focus is on Corporate Strategy, or mid to long-term planning, or sometimes the highly misnomer R&D!!. The cost of not doing so proved fatal to many companies who failed to “plan” to compete, or simply ignored to have a compete strategy as they were blindsided by smaller more nimble technology startups which overtook them. I bet you can name ten of those tech companies right now that no longer exist. You know, the software darlings of the times with the meteoric rise and speed-of-light fall.

There has been many books, research papers, etc, which study the failure of businesses. I had to read through quite a few in my recent University days (in Economics it’s called “Creative destruction” and many other terms related to Darwin’s theory of evolution). As an example, Apple and Microsoft are a great case study. At some point Apple’s “closed” business model almost cost it its own existence. However, when the PC world became the Wide Wild West of cheap components, buggy software, and so on, Apple’s business model forged ahead with a simple advantage “more stability and security”.

The economic principles behind both camps, Apple and Microsoft, were at the opposite end of the spectrum. I am talking hardware-wise. Apple was “locked, proprietary” and a “closed” ecosystem where MSFT was “Open”.

Enough theory and back to reality. If you are a business owner, executive, IT Manager, I hate to break the bad news to you: There is a cost to doing nothing! Please allow me to explain: You built a product or a service, now you are ready to sell it, how do you price it? Do you bundle it with another product? Do you follow the herd of free then premium? Build it, let will come, and then figure out a successful revenue model?! How about lock-in? Can you assure you customers they are not going to be locked in for the rest of the life of your software? The list is very long and I have yet to scratch the surface and what’s more scary is going at it alone without the aid of any theory which could be applied to address such issues.

For example of applied economics to solved project failure is an approach to treat software functionality completion as stock options where the maturity date is the completion date for that particular functionality (I borrowed this one from Barry Boehm). This is where a completion of say a report accounts for X number of options pre-agreed upon prior to the project start date. Missed the date: Your options are underwater and it’s time to focus on not missing the next cycle.

Ideas such as this one, grounded in economic theory can greatly improve performance, motivate people, and are extremely creative to solve chronic problems (how many times have you heard about projects missing deadlines with cost overruns, etc.)…. Just food for thought!

Open source software, Microsoft Strategy and the dynamics of multi-sided platforms.

You cannot beat FREE!… The Free Software movement shook the foundation of the software industry and posed a serious challenge to the very essence of capitalism in this industry. It forced vendors to offer “basic” versions of their software as an open-source, free license entry point alternative.

Microsoft is one of those vendors. Two of the severely under-advertised are two Microsoft programs for Students and Start-ups to get full version software is DreamSpark and BizSpark. It works like this: If you are a student and your school has an agreement with Microsoft, you can get a lot of free Microsoft software ranging from Visual Studio Pro to Server 2012 R2 and SQL Server 2012, Operating Systems and a load of other goodies to get you on your way to develop software for the traditional desktop, cloud, App Stores (both Windows and Mobile)…

The process is very simple. Just get to the dreamspark.com site and check if your institution has a participant agreement in place and you are set to go. DreamSpark works in a similar fashion, however, it is geared towards start-ups with a preset revenue limit and a number of developers. The cost is a few hundred dollars. This is kind of Microsoft’s strategy to influence the incubation phase of a business in an attempt to try and steer them clear of the LAMP stack.

This phenomena is not new. Most people are unaware of lowering of market entry cost by any software vendor is a very well-known strategy in any multi-sided platform business model. It is very well studied and researched in the gaming industry where the entry cost of game developers is heavily subsidized by the gaming/software platform company or sometimes the reverse is true. Of course, the subsidy is supported indirectly by the customer who always ends up being the party who ends up paying for the cost of the subsidy given to the game/software developers.

Depending on what side of the platform you are on, having a strategy is very important especially if you can pool your industry peers together to garner some buying/negotiating power. Sometimes though, being the customer is most disadvantageous position in the multi-sided platform game. Gaming companies have been lowering entry costs steadily for the past few years and if you are a product manager, there are quite a few lessons to be applied from such industry as well as a the open-source/license movement to move your wares… TBC

The Currency of Knowledge: How Realizing the Economic Value of your Knowledge Will Help You Succeed in Technology and Beyond

Remember the wheel? The first Plow? The domestication of animals? The first tribe who settled down on the Nile river delta or Mesopotamia and turned into communities farming the land and actually having the first surplus as archaeologists have discovered?

What happened afterwards? Ever since those social changes took place and the first signs of civilization begun to spring up, the only thing that has been changing since then is, yes you guessed it, Technology!

Everything we have achieved as a civilization since the day of the first surplus and amassing enough food supplies to survive droughts or bad weather gave way to a new breed of humans specializing in functions such as accounting, Trade, governing, minting money, inventing numbers then alphabets and it has not stopped since then.

Fast forward a few centuries and we get the printing press which made the diffusion of ideas an order of magnitude more when sharing a new invention which has been proven pivotal to the survival of our species and spreads a lot faster than previously.

Think about it: Everything you and I do today in any field around us is technology-related or driven by technology. 
In a past reality, economy drove knowledge, however, in today’s world it more of knowledge driving the economy.

Think about your job and ask yourself a question: Do you think that the majority of us today are information/knowledge brokers? Think about the explosion of inventions and meteoric growth of information created and is available today? Do you believe that those two trends necessitate that there are professionals like you and me who specialize in specific areas where we hold an over-average or an extraordinary amount of technical information/knowledge in the areas we specialize in regardless of the vertical industry itself.

What’s the point you may ask: The point is knowing that at the core, we are information/knowledge brokers offering our clients advice on what to do, but more importantly, what not to do, and what they need versus what they want based on the tremendous amount of knowledge we possess which is our key to reaching any goal or objective we have set for ourselves.­ It’s the knowledge we posses is what holds the key to our, and our clients’, success.

Did I lose you? Ok, let me restate this: the foundation of everyone’s career is based on his/her knowledge in the area they specialize in. Achieving awareness of this fact with some introspection on what you do day-in, day-out, is guaranteed to have an impact on how you view yourself and the way you deal with your customers and colleagues. It certainly impacted how I deal with my clients (I consider colleagues as internal clients and treat them the same way I do external clients).

In one of my favorite books, Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics by Eric D. Beinhocker, the book description states: “Accounting for the creation of wealth has long challenged humanity’s best minds” which could not be further from the truth.

The book establishes a key idea/hypothesis summarized as the ingredients to creating economic value are your usual economics foundational ideas: Land, Capital, Labor and now, Technology, as an endogenous growth factor and not an exogenous one as had been the widely held view in classical economics. Rephrasing from page 42 in the book: “The hypothesis which came to be in the mid 80’s by a Stanford economist Paul Romer…. who was became increasingly dissatisfied with the idea that that the real driver of growth, technology, was exogenous. So in 1990, Romer published a paper that kicked off the development of what has come to be known as endogenous growth theory where Romer located the source of energy for growth, not in the heroism of the entrepreneur, but in the nature of technology itself. He noted that technology has a cumulative, accelerating quality to it.” [Emphasis is mine] Simply stated: The more stuff we know, the greater the base of existing human knowledge, and the greater the payoff from the next discovery.”

This last statement is a belief which I hold very strongly and believe that the more knowledge we pass on to others, the more we are freed up to learn more.

I really like welcome your comments/opinions on this topic as I am very passionate about the subject and the very fact that technology (software) is nothing but knowledge packaged in several formats to solve business problems, empower people.